Ask Noel: investment property, debt and more

I am focusing on paying off my first home loan. Would you recommend I buy a new investment property for the future of my family, or keep paying off the first home loan quickly? I have only an average middle-class income.

The first step is to get your mortgage under control, and then think about diversifying.

I suggest control would mean having your repayments at the rate of $1100 a month for every $100,000 of your loan.

This would have it paid off in 10 years with minimal interest if interest rates were no more than 6 per cent.

As you already have a substantial amount of money in the residential property basket, namely your own home, I think a better strategy would be to start to invest in share-based investments.

The good thing about doing that is you can start small and add to your investment as your experience and confidence grow.

You don’t have to go out on limb and borrow hundreds of thousands of dollars as you would have to do if you bought investment property.

I note you use the words ‘‘new’’ investment property.

Keep in mind the secret of success in real estate is to buy a property at the right price, and then add value by rezoning or refurbishment. This is usually not possible with a new house or a unit.

If I buy a second home, keep the first home and change it to a full-time investment property, should I change the investment home loan to an interest-only loan? What should be my investment goals?

The name of the game is to maximise your deductible debt, and minimise your non-deductible debt. You do not want to be in a situation where you are paying tax on the rent from an investment property, while stuck with a huge non-deductible mortgage on your residence.

Therefore, I would certainly recommend you convert the loan to interest only, and if this is not possible, then try to get a 30-year loan where the first 10 years’ payments consist mainly of interest anyway. This should free up resources to enable you to speed up repayment of the non-deductible debt on your residence.

Readers who have a debt on their own residence now, and are thinking of renting it out in the future, should make sure extra payments are kept in an offset account, and not paid off the loan. This will maximise future tax deductibility of interest.

In a recent article you warned about the inherent dangers in debt consolidation, and mentioned the scenario where a family with several personal loans could get out of trouble by focusing on paying the smallest loan off first, and then using the payments no longer needed for that to attack the second smallest loan. If a family could not do that, what would be the harm of rolling all the personal loans into their housing loan, getting a cheaper rate overall?

Rolling all the debts into the housing loan would certainly pay them off quicker, provided the family were disciplined enough to increase the payments on the housing loan to dramatically speed up the loan term. The problem is that most people end up in financial strife because of bad money management – if they don’t change their ways many would be in worse problems if they increased the housing loan, as they would end up paying all personal loans over 30 years.

I am 66 years old and receive a part pension – my wife is not yet old enough to receive the pension. We are considering extending our home, with the extension costing around $120,000. Am I correct in my understanding that the amount spent on such an extension would become part of the non-assessable value of our residence in accordance with Centrelink rules for the aged pension?

Your assumption is correct.

Just make sure you don’t fall into the trap of over capitalising your home because the money you would lose on a resale would be more than you would save by becoming eligible for a bigger pension.

Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature. Readers should seek their own professional advice before making decisions. Twitter: @noelwhittaker